Fitch Ratings has raised its price assumptions for the Malaysian crude palm oil (CPO) spot benchmark to USD800/tonne (t) for 2024 and USD700/t thereafter. It had earlier assumed an average price of USD750/t in 2025 and USD650/t thereafter.

The revised assumptions it said reflect a slower rebound in yields in Indonesia, the world's largest palm oil producer, and increasing biodiesel consumption in the country. Despite the hike, Fitch said its assumption implies that prices will weaken from 2024, due to higher supply and competition with soybean oil.

The rating agency has also revised up its longer-term price assumptions, based on cost inflation and expectation of limited additions to oil palm acreage. Indonesia has slowed new permits for plantations, while some producers in Malaysia are selling acreage for alternative uses, such as property development. However, palm oil yields should still rise over the long-term on better seeds and cultivation practices.

Price Surge on Weak Supply
Before correcting, Malaysian benchmark CPO prices surged past USD1,200/t in early December 2024. It was the highest price level reached since June 2022, lifting the year-to-date average to around USD925/t, 10% higher than the average 2023 price.

The higher prices followed weaker output from Indonesia and Malaysia, where harvesting activity was hit by heavy rains since
September 2024. The market also priced in a demand boost next year from a higher biodiesel-blending mandate in Indonesia.

Higher Output, Other Oils to Pressure CPO
Fitch expects a rebound in CPO output in 2025, helped by a weak La Nina. The mild conditions should improve fruit yields with better rainfall, without causing disruption from flooding. Weather forecasters predict La Nina will not last beyond 1Q25. This should limit the impact on output of rival soybean oil, as La Nina induces dry weather in South America's key soybean growing regions.

Apart from higher output, Fitch said the CPO prices will be pressured in the coming months by the divergent trend for substitute soybean oil. CPO prices currently are at a premium to soybean oil, instead of the usual discount. It also thinks edible oil traders and manufacturers will reduce purchases of palm oil in favour of soybean oil.

Demand Boost from Biodiesel in Indonesia
Indonesia has mandated an increase in the share of palm oil-based biodiesel in diesel fuel to 40% from January 2025 (B40), from 35% (B35). Fitch believes the move will be implemented gradually next year, due to technical and cost challenges. Fuel terminals will have to be modified to mix and store B40, and subsidies may be reviewed since palm oil is currently significantly costlier than crude oil. The agency estimates that the B40 directive will boost global palm oil consumption by 1%-2% in 2025.